Optimum suspends Eskom coal deal
GLENCORE’S Optimum Coal Mine yesterday suspended its supply agreement with Eskom for the duration of the business rescue of the cash-strapped operation. Glencore has said the 10 million tons-a-year Optimum coal mine was under financial strain as it was selling coal to Eskom for less than the cost of production. Business rescue allows a financially distressed company to temporarily delay creditors’ claims against it or its assets. The business rescue practitioners said Optimum had offered to temporarily supply coal to Eskom at the cost of production, while a new deal is negotiated. – Reuters
GLENCORE’s chief financial officer Steven Kalmin says the $33 billion (R425bn) mining and commodity trader can protect its all-important credit rating without cutting the dividend, or “walk and chew gum,” as he puts it.
This is what Kalmin has to contend with: a rout in commodities prices that cut profit by 56 percent in the first half; a trading business earning less than expected because of a global glut in metals; and net debt that’s falling, but remains almost $30bn.
“It’s tough times for Glencore and they are going to have to work hard,” John Meyer, an analyst at SP Angel in London, said. “Let’s hope they don’t drop the gum on the sidewalk and get stuck in it because this is all-important for Glencore.”
The company spent about $2.4bn last year on paying dividends to investors, including billionaire chief executive Ivan Glasenberg, who owns 8.4 percent of the shares.
Reducing that would allow the company to pare back debt faster, providing reassurance to credit rating firms.
Despite several measures announced on Wednesday designed to bolster its finances, the stock tumbled 9.4 percent to a record low, extending the 46 percent slide this year that has made it the worst performer on the UK’s benchmark index.
Retaining its BBB rating at Standard & Poor’s, the secondlowest investment grade, is more significant for Glencore than other mining companies, as the cost of operating its trading business, which relies on credit to finance commodity deals, would increase if its rating were cut.
Glencore needed to shrink net debt almost by half to $16bn by the end of next year, based on current commodity prices, to retain its credit rating, JPMorgan Chase analysts said last week. To achieve that goal, it might need to sacrifice its dividend next year, JPMorgan said.
“We certainly think we are in good shape to be able to walk and chew gum at the same time here, which is, pay our dividends, keep our ratings where they are,” Kalmin said on Wednesday. “Our current thinking is that we can do it all.”
Glencore cut its net debt by $1bn in the first half to $29.6bn. It pledged a further $2bn reduction to $27bn by the end of next year. It also reduced its spending estimate for next year by $1.6bn.
The cost of insuring Glencore’s debt against default rose to 342.6 basis points on Wednesday, the highest since September 2012, according to data provider CMA.
Advantage
There’s one advantage of lower commodity prices. Glencore needs to use less debt to finance trading. That enabled it to reduce working capital by $3.2bn in the first half.
It’s also aiming to keep its ratio of net debt to earnings before interest, tax, depreciation and amortisation at below three to help it retain the rating. Using current commodity prices the ratio is estimated at 3.4 times, Morgan Stanley analysts said on August 4.
Another option Glencore has to help reduce its debt pile is selling inventories of commodities it holds.
It cut its so- called readily marketable inventories by $1.5bn to $17.7bn in the first half.
“The company is at pains to emphasise that the credit rating is sacrosanct, and they will do what they need to do to maintain it,” Alon Olsha, an analyst at Macquarie Group in London, said. “The dividend is very much the last option, but it’s on the table.”
Confusion in the market around its debt position was the likely reason for the share price collapse on Wednesday, Glasenberg said.
“People look at it, they don’t understand that we are part trading company, part mining company,” he said. – Bloomberg
‘We certainly think we are in good shape to be able to walk and chew gum at the same time here.’